Big Oil Isn't as Profitable as Everyone Thinks

Oil prices and profitAmericans spend a lot of money on oil -- about $632 billion a year. A lot of that money goes to paying the costs of getting the dinosaur juice out of the ground in the first place, including exploring for potential reserves, drilling test wells, drilling production wells, pumping the stuff, and transporting it. More money goes into the costs of refining oil into gasoline, and getting it to the gas stations, which take their own little slice of the pie after we fork over our $4 a gallon at the pump.

And yet, despite all those costs, big, integrated oil producers like ExxonMobil (XOM) still manage to report eye-popping profits at the end of each year -- $41 billion for Exxon last year, $25.7 billion for BP (BP) -- even the smaller ConocoPhillips (COP) managed to tuck away $12.4 billion for a rainy day.

Keep in mind that these companies all operate globally, so their profits aren't necessarily limited by how much Americans spend on oil. Still, numbers this big beg the question: Is "Big Oil" too profitable?

Are These Guys Ripping Us Off?

It's not exactly an original question. Americans have complained for years about the Big Oil conspiracy to rip off consumers -- most notably back in 2006, when the price of oil first ran up past $100 a barrel.

A more recent rant I ran across on Facebook (FB) is pretty typical of the anti-oil crowd:

"The problem with the oil industry is that we are essentially allowing the major companies to collude on the pricing of a basic resource that all people need, and that has a major impact on the cost of virtually everything else. The song and dance these companies spout doesn't add up. They say high gas prices are necessary to cover costs. Yet they seem to be able to achieve record profits quarterly. There needs to be some oversight/regulation."


What many people fail to notice, though, is the amount that Exxon (and its peers) must spend to create these profits.

In 2011, Exxon took in $433.5 billion in revenues from its oil business,. But what Exxon calls "cost of goods sold," which includes the cost of the oil it extracted as well as certain production and manufacturing expenses, ate up $304 billion of those revenues, and operating costs consumed another $75.4 billion. Factor in the $31 billion income tax check Exxon wrote to various world governments (a number equal to 75% of its profits), and a host of other, smaller costs. Even when you add in Exxon's $15.3 billion of "income from affiliates," and a $2.8 billion "gain on sale of assets," and Exxon ended up with "only" $41 billion on the bottom line.

Sure, sure. That's still a pretty big number. But it doesn't make Exxon as flush as you might think.

Does Apple Need to Be Regulated?

When you consider that $41 billion is less than 10% of the revenues that Exxon started with, it turns out that Big Oil isn't really all that profitable a business.

For example, car companies aren't often considered profit monsters. They even go bankrupt from time to time -- even though there's only about as many really big car companies in the world as there are really big oil companies. Yet somehow, Ford Motor (F) manages to earn a profit margin of better than 13% on its cars and trucks.

What about the granddaddy of all profit machines, Apple (AAPL)? It boasts a jaw-dropping profit margin of 27%. That means that when somebody walks into an Apple Store and spends $1,000 on the latest hot Apple products, Apple can expect to end up, on average, $270 richer -- after paying all the costs of inventing, manufacturing, and shipping the gizmos to the store, software included.

Yet somehow, you never hear consumers wailing and gnashing their teeth, demanding that Apple's dominance of the smartphone market be "broken up" or otherwise "regulated."

What's It Mean to You?

So what's the solution to the high cost of oil, and the high price of gasoline, and what can we do about it? Well, we could regulate the industry, as its critics advocate. But capping prices will only reduce revenues -- while costs remain fixed. Exxon will earn lower profit margins.

Its peers -- companies like Conoco and BP, which right now net only 4.8% and 4.6% of their revenues as "bottom line" profits, might start actually losing money. That won't be very good news for anyone who has a pension plan, 401(k), or mutual fund that owns stock in these companies.

You could also try driving less, or buying a hybrid or electric car. Use less gasoline, and you reduce the demand for oil. If enough people do this, it could create a situation where there's more oil out there than people want to buy, resulting in a supply glut and lower prices ... until people in China and India buy a few more cars, create more demand, and send prices shooting right back up.

In short, yes, Virginia, this is the "new normal." Expensive gasoline really is here to stay. $4 a gallon ... if we're lucky.


Motley Fool contributor Rich Smith holds no position in any company mentioned. The Motley Fool owns shares of Ford Motor, Apple, Facebook, and Exxon Mobil. The Motley Fool has bought calls on Facebook. Motley Fool newsletter services have recommended buying shares of Facebook, Ford Motor, and Apple, creating a synthetic long position in Ford Motor and creating a bull call spread position in Apple.

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110 Comments

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aprilapril13

big oil makes the price of everything go up
how do we keep up with that we cant!
it pisses me of that i can't stop them from raping me
i call for help no one ever comes, obama found out there nothing
he can do! these guys need to be shot dead. its worse than the mob

our goverment is all for this ****. but here them tell it we are the best nation on the planted!
"The best at fuc*ing its people over"

How does everything goes up, but our income?

October 16 2013 at 6:52 AM Report abuse rate up rate down Reply
lgnu

I think you need to look at Return on Investment very carefully to see what's actually invested.

October 24 2012 at 1:49 PM Report abuse rate up rate down Reply
lgnu

Yeah, there on my charity list. Apparently whether I want them there or not. Let's have a little discussion about the depletion allowance which the oil companies themselves say they don't need.

October 24 2012 at 1:44 PM Report abuse rate up rate down Reply
oneshot5555

Considering what they are selling is obsolete, I would say they are making plenty of money.

Way back in the 1970's when the oil embargo hit, people started saying we need to find alternative energy sources for our cars. Now 40 years later and who knows how many wars, we are still in the same boat. Even the gas milage has not really improved.
What has changed is the amount of proven alternative energy sources that we could use. Even if just 10% of the cars on the road used alternative energy that would make a huge diffence!

But No. Why? Entrench buisness interests. Oil companies are not going to sit and watch as alternate energy cars take a bite out of their billion dollar profits, they are going to supress any move in that direction big time.

October 24 2012 at 3:22 AM Report abuse rate up rate down Reply
flowrpower2002@yahoo.com

gee, not a word about the speculation on oil, which is what's lead to the prices we see today. And, not a word about raising capital gains, which would tax speculation, and would help capital intensive producers like the oil companies. It helps them cause they aren't flipping capital, but using it for years. As that capital ages, firms get to write off depreciation, which is credited at the cap gains rate. So, higher cap gains will reduce speculation while providing incentives to manufacturing and cap intensive production.

October 23 2012 at 11:15 PM Report abuse rate up rate down Reply
Robert

Oil is a necessity, an ipod is not. All domestic oil production and refining should be taken over by the government. That would end the gouging and give us a revenue source. These multinational companies benefit only themselves, to the detriment of the people of the USA. And other nations.

October 22 2012 at 8:49 AM Report abuse rate up rate down Reply
4 replies to Robert's comment
maa2626

Buy ExxonMobil stock, it will make you feel bette at the pumps. They have a solid track record and dividend.

October 22 2012 at 7:06 AM Report abuse rate up rate down Reply
1 reply to maa2626's comment
s.kohanski

I agree,if you have any to spare.

October 22 2012 at 11:36 AM Report abuse -1 rate up rate down Reply
Mr. Phelps

So can you tell me much Exxon Mobile wrote to the US government for it income taxes??'

You say it isn't profitable but they earned much more than other companies and paid far less, in fact far less than even Walmart. I'd say there doing much better than the other US corporations

Pre-tax earnings: $73.3 Billion
Tax Provision: $31.1 Billion (42%)
Actual Taxes Paid to U.S. federal government: $1.5 billion (2%)


http://www.nerdwallet.com/blog/markets/2012/corporate-taxes-only-9-percent/#.UB-zQshYu9c

October 22 2012 at 12:58 AM Report abuse rate up rate down Reply
2 replies to Mr. Phelps's comment
tj1108

Dont know much about numbers that are put out by focus groups but Exxon profit has fluctuated between 2-5 billion. I think the 73 billion would be more accuratly stated outlay or cashflow.
If their reccord profit of 5 bil would put profit % at less than 7%. And that would be before taxes. That dosent sound so great.

October 22 2012 at 10:44 AM Report abuse +1 rate up rate down Reply
flowrpower2002@yahoo.com

They operate loads of capital intensive plants here. Their expenses are higher, and they pay loads of taxes through other tax avenues. Walmart avoids much of this by producing overseas. No, Exxon is a hero, Walmart is a zero.

October 24 2012 at 1:28 AM Report abuse rate up rate down Reply
cae303

Tremblevor Grow up. Your childish behavoir is not impressing anyone.
If you are not aware of excessive profits made by the oil
companies in a rigged market system you are in denial
Acting like a juvinile will not change these facts.

October 21 2012 at 10:40 PM Report abuse +1 rate up rate down Reply
1 reply to cae303's comment
t_trevor1

cae, tell us how a stooge like you got so stupid to not be able to calculate something as elementary as ROI?

Is it genetic? Surgical? A terrible accident? What?

October 21 2012 at 11:12 PM Report abuse -3 rate up rate down Reply
1 reply to t_trevor1's comment
cae303

mentalvor.. Your anger and childish behavior is completely out of control.
Watching you "Throw a tantrum "is not a surprise. Time to grow up!
There is professional help.

October 22 2012 at 12:13 AM Report abuse rate up rate down
kavieng

Oil has at least 10,000 known commercial uses. We have onl learned to burn it as fuel and to now use it in cosmetics, plastics, symthetic fibres and a few other uses. 35% of the crude oil from the ground is distilled or converted into fuel oils and lubricants.

The profit from oil is from a variety of crude oil derivatives. As for the oil companies, the speculative trading aspect of oil is another profitable, highly profitable pofit centre not usually made very public. Then there is the foreign exchange gains which they also say little about and finally the government granmts and subsidies which they generously pocket for themselves.

Because it is not only fuel, we will be dependent on the middle east and other states that produce oil for a long time.

October 21 2012 at 9:08 PM Report abuse rate up rate down Reply
1 reply to kavieng's comment
s.kohanski

So I guess American taxpayers are getting ripped off for paying 27 billion dollars a year to the Department of Energy for their failed services since 1979.

October 22 2012 at 11:35 AM Report abuse rate up rate down Reply